Italy’s electoral earthquake is ‘‘a catastrophe for the euro and the European Union’’, according to Luxembourg’s foreign minister, Jean Asselborn.

Italy is big enough to bring down the eurozone if mishandled.

The verdict was much the same in chancelleries across the eurozone, especially in those countries already starting to feel the first wave of contagion.

‘‘The result touches us all,’’ said Spain’s foreign minister, Jose Manuel Garcia-Margallo. ‘‘It is a jump into the void that bodes well for nobody, neither for Italy, nor for the rest of Europe.’’

Advertisement

Almost 57 per cent of the Italian vote went to parties that have vowed to tear up the EU austerity script. Together they control a majority of senate seats.

The Five Star movement of comedian Beppe Grillo, which won 25 per cent of the vote, has called for a euro referendum and has a return to the lira as one of its manifesto pledges, while ex-premier Silvio Berlusconi has threatened to pull Italy out of the currency bloc unless the EU switches to a reflation strategy.

Even if the centre-left leader, Pier Luigi Bersani, can put together a ‘‘grand coalition’’ with Mr Berlusconi, there is no going back to the hairshirt regime imposed by Mario Monti’s technocrat government at the EU’s behest over the past 15 months.

‘‘A deal with Monti is impossible,’’ said Mr Berlusconi yesterday. ‘‘His austerity policies have put the country into a dangerous recessionary spiral, with rising debt and unemployment, and the closure of a thousand firms a day.’’

The great fear is that the European Central Bank (ECB) will find it impossible to prop up the Italian bond market under its Outright Monetary Transactions (OMT) scheme if there is no coalition in Rome willing or able to comply with the tough conditions imposed by the EU at Berlin’s behest. Europe’s rescue strategy could start to unravel.

Andrew Roberts, credit chief at RBS, said: ‘‘What has happened in these elections is of seismic importance.

‘‘The ECB rescue depends on countries doing what they are told. That has now been torn asunder by domestic politics in Italy. ‘‘The big risk is that markets will start to doubt the credibility of the ECB’s pledge.’’

It is a widely shared view. Luigi Speranza, from BNP Paribas, said: ‘‘We fear the markets could lose faith in the OMT’s effectiveness.’’

Bond buying under the OMT can begin only after countries in trouble request a rescue from the EU’s bail-out fund under strict terms.

This then requires a vote in the Bundestag.Germany’s ECB board member, Jorg Asmussen, backed the plan when it was unveiled in August, signalling the crucial acquiescence of Chancellor Angela Merkel. The concern is that Germany could withdraw that assent if provoked.

Mr Roberts said: ‘‘The big unknown is how much Germany is going to buckle over the next six months. German leaders want to keep up the appearance that the eurozone crisis has been solved, at least until their elections in September.’’

In one sense, Italy is in a weak bargaining position. It must raise 420 billion euros this year, making it acutely sensitive to the latest surge in borrowing costs. Yields on 10-year bonds surged 34 basis points yesterday, pushing the spread over German Bunds to 330, with traders eyeing the 400 level where stress begins in earnest. Italian bank shares tumbled in Milan, with Intesa Sanpaulo down 8.4 per cent on fears of losses on sovereign bonds.

Yet Italy is big enough to bring down the eurozone if mishandled. It is also the one Club Med country with enough fundamental strengths to leave EMU and devalue, if it concludes that would be the least painful way to restore 35 per cent of lost competitiveness against Germany since the launch of the euro.

It has low private debt and euros 9 trillion of private wealth. Its total debt level is 265 per cent of GDP, lower than in France, Holland, the UK, the US or Japan.

Its budget is near primary balance, and so is its International Investment Position, in contrast to Spain and Portugal. It could in theory return to the lira without facing a funding crisis, and this may be the only way to avoid a crisis if the ECB withdraws support. Any attempt to force Italy to knuckle down risks backfiring disastrously for EMU creditors.

The question is whether the election will prompt a radical rethink in Brussels and Berlin. Martin Schulz, the European Parliament’s president, said the vote had shown the intellectual bankruptcy of current EU policies.

‘‘People will make sacrifices, but not at any cost,’’ he said.

Defenders of the Monti policy say in retrospect that it was an error to push fiscal tightening of 3 per cent of GDP last year when Italy was already in depression - and did not have a deficit crisis - and neglect the greater task of marshalling public support behind reforms.Critics are harsher.

Nobel economist Paul Krugman said the EU policies imposed on Italy and others has been ‘‘a disastrous failure’’. If there is no change in strategy, this election will be ‘‘just the foretaste of the dangerous radicalisation to come’’.

The Telegraph, London

24 comments

Individuals vote according to what's best for them, not what's best for their country. Italians would prefer to obliviously waltz down the path of increasing debt than brave the difficult road of financial reality.

It's not fair for the selfishness of one country to drag down the other EU nations. The single currency has to go.

Commenter

YMM

Location

Sydney

Date and time

February 27, 2013, 9:07AM

YMM last year Greece was going to drag the Euro down and before them somone else. Same old story. If one country can drag down the economy of 15 or so others or even the world then blame the so called 'Expert Economists' who created it all not the people with small pensions or no jobs. Governments have let multinational companies & financial institutions dictate policies to them for a long time. They need to take back control & hold them all accountable and stop blaming the little old lady or man that lives in some remote village in a modest house of tax evasion or retiring early etc etc. All the Europeans should get out now or face poverty for the next 20 years. If the experts knew how to fix this they would. It is a financial cancer and Capitalism is the cause.

Commenter

Same old Same old

Location

Port Melbourne

Date and time

February 27, 2013, 9:56AM

@same old same old - Capitalism is not the cause alone. You are forgetting powerful ingredients in the mix like, corruption, the entitlement syndrome, socialist style decision making, natural unequal distribution of national abilities clashing heavily with a fixed common currency, outright criminality on an industrial scale in many many areas.I think people are confusing Capitalism ideology with stone cold tax evasion and general selfish criminal activity. They are not the same thing at all

Commenter

eyeswideopen

Location

earth

Date and time

February 27, 2013, 10:32AM

Your missing the big problem, if Italy defaults the entire global banking system is at risk. The government debt default will create a domino effect that would take down the world as counter party risk rises and interest rates spike to double digits. There are also 750 trillion in derivative insurance contracts linked to the debt that could not be back stopped by any government. 2008 gfc would look like nothing with what would happen. We live in interesting times my friend. The Great Depression would be optimistic

Commenter

Harry Bath

Date and time

February 27, 2013, 11:46AM

It was always going to take a left field event o get this crisis into full swing. Whether or not Italy is the catalyst remains to be seen, but you can bet that whatever kicks it off, can't be too far off. Of course Permabulls will want an exact time and date.

Commenter

The Oracle

Location

Oberon

Date and time

February 27, 2013, 12:52PM

William Banzai at Zero Hedge predicted this two years ago. His political economy satirical art is better than Andy Warhol.

Commenter

Buddy Rojek Convener Australian Nationalist Party

Location

Date and time

February 27, 2013, 3:57PM

Ah! In the words of the Jimmy Buffet song, "None of the natives are buying any second hand American dreams". Is it surprising that ordinary Italians like many others reject taking the pain caused by the excesses of free market capitalism. Funny money derivatives, currency trading,highly suspect "ratings agencies" with obvious conflicts of interest and banks now not even vaguely resembling ethical and stable financial institutions. Casino capitalism and economic hegemony beloved of the United States has now unravelled. The euro like the EU was a bold plan that has simply been sabotaged by con men.

Commenter

Skipper

Location

Brisvegas

Date and time

February 27, 2013, 9:43AM

Don't you mean the mafia who make up an estimated 10% of Italys economy?

Commenter

nick

Location

Date and time

February 27, 2013, 12:45PM

I hope Italy drops out and goes back to the Lira which would be better for them. The lira would be worth a lot less than the Euro, which would mean travel would increase to Italy as people will find it a cheap place to holiday and Italy will get a surge in manufacturing as companies move manufacturing to Italy.

Most importantly, it will only hurt the rich, not the poor as the poor have nothing and it's getting worse for them, not better.

Commenter

Mel

Location

Mel

Date and time

February 27, 2013, 9:59AM

It would be good for them? It would be a disaster!

What do you think a Lira will be worth on the market? Their energy costs, gas and petrol, could skyrocket out of control. The Italian people need to think about their own well being and not care about some bloody tourists!